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Accountants describe a given cost’s behavior pattern according to the way its total
cost (rather than its unit cost) reacts to changes in a related activity measure. Every
cost in an organization will change if activity levels are shifted to extremes or if
the time span is long enough. However, a total cost may be observed to behave
within a period in relation to limited changes in an associated activity measure.
Activity measures include production, service and sales volumes, hours of machine
time used, pounds of material moved, and number of purchase orders sent. To properly identify, analyze, and use cost behavior information, a time frame must
be specified to indicate how far into the future a cost should be examined, and a
particular range of activity must be assumed. For example, the standard-sized container
of polyethylene material for WF&B to make a production run might increase
by $1 next year but by $5 by the year 2010. If WF&B’s management is planning
for next year, the $1 increase is relevant but the $5 increase is not. The assumed

range of activity that reflects the company’s normal operating range is referred to as
the relevant range. Within the relevant range, the two most common cost behaviors
are variable and fixed.
A cost that varies in total in direct proportion to changes in activity is a variable
cost. Examples include the costs of materials, wages, and sales commissions. Variable
costs can be extremely important in the total profit picture of a company, because
every time a product is produced and/or sold or a service is rendered and/or
sold, a corresponding amount of that variable cost is incurred. Because the total
cost varies in direct proportion to changes in activity, a variable cost is a constant
amount per unit.
Although accountants view variable costs as linear, economists view these costs
as curvilinear as shown in Exhibit 3–4. The cost line slopes upward at a given rate
until a range of activity is reached in which the average variable cost rate becomes
fairly constant. Within this range, the firm experiences benefits such as discounts
on material prices, improved worker skill and productivity, and other operating
efficiencies. Beyond this range, the slope becomes quite steep as the entity enters
a range of activity in which certain operating factors cause the average variable
cost to increase. In this range, the firm finds that costs rise rapidly due to worker
crowding, equipment shortages, and other operating inefficiencies. Although the
curvilinear graph is more correct, it is not as easy to use in planning or controlling
costs.